By Marcia Zarley Taylor
DTN Executive Editor
HADDONFIELD, N.J. (DTN) -- Farmland values may be off their peaks, but keen interest from Wall Street and other wealthy investors may keep real estate from tanking as deeply as it did in the last crash 30 years ago.
Just take the buying spree of Farmland Partners Inc. (NYSE: FPI), one of the nation's first agriculture-only real estate investment trusts, or REITs. This week, it announced acquisition of 22,300 acres of Illinois farmland for a purchase price of $197 million. That makes the sale (composed of 120 farms owned by racing car magnate and businessman Gerald Forsythe and his family) the largest farmland transfer in modern Illinois history, local realtors say. Forsythe, of Wheeling, Illinois, had spent decades accumulating the properties in Edgar, Clark, Coles, Crawford, Douglas, Vermillion and Cumberland counties. He also serves as a chief shareholder and CEO of Indeck Energy Services.
The record-breaking Illinois deal is just a fraction of what the REIT intends to acquire nationwide. In a 2014 interview with DTN, Farmland Partners' CEO Paul Pittman said he expected to be running a multi-billion dollar fund in five or 10 years. "Thirty billion dollars of farmland trades hands every year. [Ag REITs] could be a very large industry," Pittman said (read full story at http://goo.gl/…).
Outside of agriculture, REITs have become a fixture of real estate investing. It's a way to bundle what can amount to trillions of dollars in apartment complexes, shopping centers or commercial real estate, and then pay public investors a share of the rents.
In this latest acquisition, Forsythe will receive $50 million in cash and the balance in a combination of stock and other ownership shares for the deal, so the properties will add enough collateral to allow Farmland Partners to acquire another $100 million of farmland properties elsewhere, the company said in a press release. Many of those properties are already in negotiation.
However, it was the scale of the Illinois deal that stunned many locals. "I don't know any sale bigger than 22,300 acres in my 42-year career," said Mac Boyd, a farm realtor based with Farmers National Co. in Arcola, Illinois. He once sold a 19,500 acre tract -- one of the two or three biggest sales in the state's history -- but he was not involved with the latest transaction.
For Boyd, it's a sign that investors may be replacing some of the fierce farmer bidding during 2010-2012's high income years.
"When farm income surged, farmers were buying most of the properties," Boyd said. "Now we're seeing investors coming back and buying a lot of this land."
Absentee owners have always held 70% to 75% of farmland ownership in his home Douglas County, he added, including retired farmers and wealthy locals. Nebraska, Illinois, Indiana and Ohio have been particularly attractive to newfound interest from pension funds, insurance companies and other institutional owners, since they lack the corporate farmland ownership bans still technically on the books in other Midwest farm states. In Iowa, where corporate ownership is prohibited, investor groups buy properties as individuals.
But with the stock market still skittish and bonds suffering from uncertain Federal Reserve policy, farmland remains an attractive option for investors of all stripes -- if they consider capital gains as well as modest cash rents.
Despite an expected 40% drop in nationwide corn revenues since 2012, good-quality Iowa land values have only dipped 8% below their 2013 peak and have rebounded since mid-year, according to the Peak Soil Iowa Farmland Value Index (http://goo.gl/…), which measures actual sales transactions. Recently, AgriBank, a Farm Credit lender whose territory covers 15 Grain Belt states, described the land market this year as "slowing markedly, while not declining." States like South Dakota with more diversified crop bases actually soared 8.7% in the most recent USDA real estate survey. Federal Reserve farmland surveys released this week also show most Midwest land stabilizing in price.
Normally, land values would mirror farm income's deterioration, but today's land values are moving sideways, said Mike Duffy, an Iowa State University emeritus economist. "Farmers with money are still buying land. And outside investor interest is still strong." Besides Farmland Partners, he cites firms like John Hancock and the pension and mutual fund company TIAA-CREF, which has dedicated $8 billion to farmland in the U.S. and overseas since 2007.
While small compared to established institutional investors, Farmland Partners is on a high growth path. It launched its initial public offering in April 2014 with a mere 7,300 acres. Later, it acquired up to $165 million in debt capital from Farmer Mac, much of it in interest-only, fixed rate bonds. With the Forsythe purchase in Illinois, Farmland Partners will oversee a portfolio of nearly 100,000 acres of cropland scattered across Arkansas, Colorado, Georgia, Illinois, Kansas, Louisiana, Michigan, Mississippi, Nebraska, the Carolinas and Virginia. Unlike two other infant ag REITs that concentrate on specialty crop farms, Farmland Partners focuses on row-crop farms, including corn, soybeans, rice, cotton, canola, edible beans and milo.
Although farmland values were beginning to swoon a year ago, Pittman said he didn't see the sky falling on land values. "Short of a global pandemic, it's hard to figure out how farmland is not worth more five, 10 or 15 years from now," he told DTN at the time. "Does anyone think we won't need more corn in the future?"
Long term, farmland's appeal is that it has outdistanced other investments with less volatility. Between 1950 and 2015, Iowa farmland averaged 11.2% annual returns including both net cash rents and capital gains, Duffy said. Over that 65-year period, farmland showed 52 years of positive returns. That's better than the S&P 500 gains (with dividends) over history, he said.
Timing counts, however. "If you invested in farmland in the 1970s and early 1980s, you would have been better off in stocks than in farmland," Duffy said. "Any other time, except the past couple of years, you'd have been better off investing in farmland." The argument now is should you get back in before prices go back up, or wait another year or two.
Boyd agreed the future direction of farmland still depends on farm income, but a dearth of alternative investments is keeping farmland afloat at the moment, he said. Banks pay only 0.1% on liquid savings accounts, discouraging conservative farmers and other local investors with funds to spare.
"The upper crust still has cash to spend," Boyd said. "They're wondering when the stock market will fall out of bed. They aren't expecting land values to go to heck."
Marcia Taylor can be reached at Marcia.taylor@dtn.com
Follow Marcia Taylor on Twitter@MarciaZTaylor
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